What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) is a formal agreement between an insolvent company and its creditors, facilitated by an Insolvency Practitioner (IP). It serves as an alternative to liquidation, administration, or receivership, allowing the company to reach a settlement with creditors by paying a portion of its debts and writing off the remainder. Importantly, the company continues to operate under the control of its directors, avoiding closure.
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Advantages of CVA |
Disadvantages of CVA |
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Business Control: Directors retain control of operations. Protection from Creditors: Once approved, creditors cannot take legal action against the company. Business Continuity: Allows the company to continue trading and potentially recover. Debt Relief: Offers immediate cash flow benefits through debt forgiveness. Flexible Terms: Can be adjusted during the five-year term to adapt to changing circumstances. |
Long Commitment: The five-year term may be restrictive for some businesses. Changing Projections: Business forecasts may vary over time. IP Fees: Costs are incurred for IP services drawn from CVA funds. HMRC: If HMRC are owed a large amount, they will likely propose restrictive modifications to the proposal. |
How Does it Work in Practice?
To illustrate, consider the following example:
Scenario
A company, previously successful, loses a major client representing 40% of its turnover due to the client entering liquidation. This leads to significant bad debt and a reduced turnover, rendering the company unable to pay its debts.
Options
Directors can either cease trading and liquidate the company or opt for a CVA. They believe restructuring the business can lead to profitability despite the reduced turnover. They engage an IP to facilitate the CVA.
FAQ's
Payments are based on surplus profits over a five-year period, aiming to provide a reasonable return to creditors.
No, all creditors included in the CVA are bound by its terms and cannot take enforcement action.
Usually five years, allowing sufficient time for creditors to receive payments.
At least 75% of unsecured creditors by value must approve the CVA proposal at the creditors' meeting.
Existing directors and management retain control throughout the process.
IP fees are a percentage of the funds generated through the CVA, drawn from the CVA pot.
Typically about six weeks from start to finish. This is dependent on the complexity of the company
If circumstances change, a revised CVA proposal can be presented to vary payment terms mid-term. Failure to make payments may ultimately lead to liquidation.
Success depends on the company's ability to trade profitably and meet the agreed monthly contributions.
